USDA Reports More Corn and Cotton, But Less Wheat

A strong corn export market and the rapidly expanding use of corn for fuel ethanol produced a large increase in corn prices that began last fall and led to record corn prices by summer 2007. Farmers responded by planting 93 million acres of corn in 2007, the highest level since 1944. In that year, the average corn yield was 33 bushels per harvested acre (b/a), producing a crop of around 2.8 billion bushels. Yields have increased a bit since then, as the USDA now estimates 2007 corn yields at 155.8 b/a. This would be the second-highest U.S. corn yield, behind only 2004.

According to the September reports, the USDA has raised its expectation of the 2007 corn crop to 13.3 billion bushels. This is 254 million bushels higher than its estimate last month, and would be 26% larger than the 2006 crop. It would be by far the largest U.S. corn crop ever, easily topping the 2004 total of 11.8 billion bushels. The increase in the corn yield estimate was a bit of a surprise, considering the dry conditions in the Southeast and the Eastern Corn Belt. The USDA raised its yield estimate for most major producing states.

On the demand side, the USDA raised its projection of 2007/08 feed and residual usage of corn, which tends to be a function of crop size, by 100 million bushels. Projected usage of corn for fuel (ethanol) use was lowered by 100 million bushels, although USDA still expects that category to grow by more than 50% from 2006/07. Projected exports were raised by 100 million bushels, due to lower projected corn production and higher imports for the European Union.

Although the 2007 wheat production estimate was left unchanged, projected carryover stocks were still lowered by 42 million bushels from last month's estimate. If realized, 362 million bushels of wheat by June 1, 2008, would be the lowest level of ending stocks since 1973/74, when wheat prices more than doubled from the previous year. Projected U.S. wheat exports were raised due to the rapid early pace of grain sales, and imports were lowered due to a smaller Canadian crop.

Wheat prices have been increasing steadily over the past couple of years due to declining world stocks, and crop production problems in many major producing countries, including Australia, Canada, and the EU countries, has led to a reduction in world wheat stocks. As with the U.S. case, the world wheat supply situation is the tightest since the mid-1970s.

Projected U.S. soybean production was lowered just slightly from last month, with an expected crop of 2.62 billion bushels. The increase in 2007 corn acreage came largely at the expense of soybean acreage, leading to an 11.4-million-acre drop in soybean plantings. Soybean prices have been rising over the past few months, due to the expected smaller 2007 crop and to strong world demand for vegetable oils, including soybean oil.

Robust demand for soybean oil and meal caused the USDA to raise its projection of 2007/08 soybean crush by 25 million bushels, but projected exports were lowered by 45 million bushels. The strength in soybean prices is expected to spur increased soybean production in South America in 2007/08, which should cut U.S. export prospects.

The USDA lowered its estimates of 2007 cotton acreage by 200,000 acres, but an increase in projected yields resulted in a higher crop production estimate. In contrast to virtually every other major U.S. crop, cotton is in an oversupply situation due to drastically declining domestic usage. Higher exports were offsetting the decline for awhile, but U.S. cotton exports dropped from 18 million bales in 2005/06 to 13 million bales in 2006/07. Part of this decline is attributable to the elimination of the Step-2 cotton marketing program at the end of the 2005/06 marketing year. Some exports were pulled forward into 2005/06, since it was known in advance that the demand-inducing subsidy payments would be ending. The USDA projects that cotton exports will rebound to 16.7 million bales in 2007/08.

According to the revised numbers, U.S. cotton-planted acreage dropped from 15.27 million in 2006 to 10.85 million in 2007. Even with that drop in acreage and a hoped-for bounce in cotton exports, cotton acreage may slip further in 2008 as expected returns for cotton pale in comparison with alternative crops. Farmers in Texas—by far the biggest "swing state" in terms of cotton acreage—are experiencing good yields for corn, wheat, and sorghum in 2007. Favorable moisture conditions heading into 2008, plus higher relative prices for grains, could lead to a further shift out of cotton acreage in Texas and other states.

Global Insight expects to produce a new short-term forecast next week, which incorporates the more recent supply/demand information. Based on the continued strength of wheat prices, Global Insight expects to increase its forecast of 2008 wheat acreage. Global Insight's last forecast was for 2008 wheat-planted acreage of 61.8 million acres, up 1.3 million from 2007. It is likely that that forecast could be raised by another million acres or so, split between winter and spring wheat.